Why do I need an Umbrella Company?
If you have just secured your first contract, your agency has probably advised you to find yourself an Umbrella Company; your first thought may well have been what on earth are they talking about!!
As an independent contractor you will be expected to submit invoices for the work that you do for your agency/client; you will also be responsible for your own income tax and national insurance contributions. This could be done through your own Limited Company but some contractors don't like the hassle or the responsibility and prefer to have someone manage their affairs for them - this is the role of an Umbrella Company.
An Umbrella Company will raise invoices on your behalf for the hours/days that you work. They will then, once funds are received from your agency/client, make payment to you with the appropriate deductions for tax and national insurance. As an independent contractor you are allowed to claim certain business expenses as you would be through your own Limited Company and these should also be processed by your Umbrella Company.
An Umbrella Company will make payment to you through PAYE (pay as you earn) and you should receive a payslip from them in the same way as would in permanent employment. However, there are two differences - one, as already mentioned, is that you can claim expenses; the other is that you will be liable for both employee's and employer's national insurance contributions. The reason for this is that an Umbrella Company will make payment to you assuming that your contract falls inside IR35. Our online calculator is a useful tool for estimating your net pay.
You may or may not have heard about IR35; visit our Free Guides section where you can download an IR35 guide with detailed information on the legislation.
You should be aware that all Umbrella Companies are, effectively, controlled by Inland Revenue regulations. All payments are made through PAYE and the Inland Revenue also dictates which expenses you are allowed to claim. Therefore, the only difference to your earnings will be the Umbrella Company fees; these can vary enormously and you should always check that there are no 'hidden' charges before signing up.
“What should I look for when searching for an Umbrella Company?” is a common question amongst contractors – With this in mind we have set-up a basics guide to Umbrella Companies.
Our Choosing an Umbrella page covers the most common marketing ploys used by Umbrella Companies and will help you sort through the good and the bad.
We have also written a free contracting guide which you can download from here.
We try to keep things as simple as possible for our customers but if you do need any help using our service or you have any queries at all our Account Managers will be pleased to help you.
